Households across England are facing an inflation-busting £2bn council tax raid this spring despite Rishi Sunak’s promise of pre-election giveaways to save his premiership.
In a deal to address the worsening financial crisis hitting town halls across the country, officials in Michael Gove’s levelling up department have told local authority bosses they expect the maximum possible 4.99% increase to be applied to council tax in April.
The increases are likely to add about £100 to a typical band D council tax bill, adding to the financial pressure on families, with inflation currently at 4%.
It comes as Sunak prepares to put cuts to income tax at the heart of the Tories’ re-election strategy, with a raft of measures expected to be announced in the spring budget, to be paid for by “difficult decisions” to limit spending on public services and welfare.
Local government leaders and experts warned that by raising council tax, the burden of the financial crisis in councils was being shifted to the poorest households.
David Phillips, an economist at the Institute for Fiscal Studies, said it would hurt the poorest households most because council tax forms a larger share of their monthly outgoings than that of a wealthier family.
“Increasing council tax while cutting most direct taxes – for example, national insurance, income tax and especially capital gains tax and inheritance tax – would be regressive,” Phillips said.
Last week Gove announced an injection of an extra £600m into local government funding in England to stave off the threat of a Commons rebellion by Tory MPs worried about cuts to services in their constituencies.
He told MPs: “Taking into account this new funding, local government in England will see an increase in core spending power of up to £4.5bn next year, or 7.5% in cash terms, an above-inflation increase, rising from £60.2bn in 2023-24 to up to £64.7bn.”
However, in details glossed over by the government, almost half of the £4.5bn boost is based on the assumption that every local authority in England applies the maximum allowable council tax rise. If it was frozen, the package would be worth a rise of about 4%, matching the current rate of inflation.
Roger Gough, the Tory leader of Kent county council, said: “That spending power means us taxing the residents of Kent more. Or at least the government’s expectations are based on that.”
James Lewis, the Labour leader of Leeds city council, said: “People are paying more council tax each year and getting a lower level of service, as it stretches to cover reduced government grants.”
He said the share of his city’s budget that was funded by Westminster had fallen from about 36% a decade ago to about 5%, after cuts worth £2.5bn in total. “But we’re still expected to cover that gap, largely through savings, council tax increases and money we make through fees and charges for services.”
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Figures from the Institute for Government show councils have raised 30% more from council tax in real terms since 2010, in an attempt to fill a gaping hole from cuts to grant funding of about 40% during the Tories’ first decade in power.
Stuart Hoddinott, a senior researcher at the thinktank, said: “It’s just shifting it to another place. You’re replacing centralised taxation with localised taxation. It’s as much of a burden on individuals as a rise in income tax, it’s just one that’s attributed to councils as opposed to central government. [But] if it allows the chancellor to announce they can cut tax by X at the budget, I can see why that would be appealing.”
Ben Bradley, the Conservative MP who is also leader of Nottinghamshire county council, welcomed last week’s funding increase for councils, but said: “There’s almost no point chopping £100 off tax bills nationally if you’re adding on to it with council tax. There is support out there and polling that people are keen to see investment in public services as a priority. There is scope to do both.”
Council tax increases are capped at 4.99% each year unless a local referendum approves a higher amount, which has never happened. Only one referendum has ever been held, in Bedfordshire in 2015, when a majority of residents voted against it.
Several troubled councils have been granted bigger increases of up to 15% by Gove in response to “exceptional” financial circumstances, including Croydon, Thurrock and Woking. Others, including Birmingham and Somerset, are seeking approval for 10% increases.
The rises come amid growing calls for changes to council tax, which remains based on 1991 property valuations despite a vast increase in house prices over the past three decades. Council tax was introduced in 1993 to replace the community charge, known as the poll tax.
Last week the Northern Powerhouse Partnership (NPP), the group founded by George Osborne to promote economic growth in northern England, said changes to council tax could help address the worsening “emergency in local government” for those authorities in less affluent areas with the lowest tax bases.
The NPP said a household living in a house in Hartlepool worth £150,000 was paying more than £200 a year more in council tax than someone in Westminster in a property worth £8m.
A government spokesperson said: “Councils are responsible for their own finances and set council tax levels but we have been clear they should be mindful of cost of living pressures. We continue to protect taxpayers from excessive council tax increases through referendum principles.”
